Shareholder Democracy, Google Style

August 26, 2004|By MICHAEL KINSLEY Los Angeles Times

Google, the Internet search engine company, went public on Thursday, and shares offered at $85 were soon trading at more than $100. No one is forced to buy Google shares. People do it voluntarily, even downright eagerly.

This is so even though what they are buying are so-called Class A shares, which might more accurately be labeled second-class shares. First-class shares, mischievously called Class B, are held by the company's two founders and other executives. In terms of dividends and so on, the two classes are identical. But Class B shares get 10 votes each while Class A shares get only one. This means in effect that the company can raise money, and the founders can get fabulously rich by selling stock to the public, but even with a tiny minority of the shares the founders will control the company. And the public shareholders can't do anything about it.

Google thus thumbs its nose at one of the major pieties of our day: shareholder democracy. This has been the high-minded response to Enron and the other corporate-looting scandals: Shareholders should have more say -- or, more precisely, some say, since now they basically have none -- about the management of their companies. That way, management couldn't so easily overpay itself or loot the company in more dramatic ways. The SEC is considering rules to make it easier for large institutional investors, at least, to challenge management nominees for boards of directors.

It's democracy. Who could be against it? Yet just last week, despite Enron, WorldCom and all, investors kicked and clawed to put money into a company that, in democratic terms, might as well be the old Soviet Union. Apparently they don't care. They want to be serfs. Are they nuts? Financial masochists?

In their prospectus, Google's founders have some malarkey about how they're doing this dual-class business to prevent the company from being overly concerned with short-term profits and enable it to take the longer, ultimately more profitable, view. In other words, they think they know the shareholders' interests better than the shareholders themselves do. Shareholder-democracy buffs, like the SEC, are saying the same thing when they try to pressure, or require, companies to make democratic reforms.

Another company with dual classes of stock is Berkshire Hathaway, run by the legendary Warren Buffett. The last thing in the world that even second-class shareholders of Berkshire want is shareholder democracy. They're buying into Buffett's benign dictatorship, not into a pro-rata share of the wisdom of any idiot who buys in, too. They're delighted to have no say in the company, as long as they are assured that others like themselves have no say either. That is far from nuts.

You can believe them, or you can believe it's all about dynastic vanity. But these companies are being honest about having goals other than maximizing profits, and the price of their shares will reflect the extent to which others wish to share in this enterprise. Why stop them, or even sneer at them?

Advocates of shareholder democracy believe it will lead to companies that care more for the environment, treat their workers better and so on. Well, maybe, maybe not. In a world of perfect corporate democracy, in which large public companies are required to pursue only those goals that can be agreed upon by the owners of a majority of the publicly traded shares at any moment, the likely result would be companies focused exclusively on maximizing profits.

Requiring shareholder democracy actually stifles it. Why shouldn't shareholder democracy include the right to decide whether or not you want shares in a company that practices shareholder democracy?

Kinsley is editorial page and opinion editor for the Los Angeles Times. *